Are Wealth Managers Alone at Fault?

As the year 2010 comes to its end, there popped a shocking news about a wealth manager of a renowned multinational bank who diverted about 4oo crores rupees of its customers/clients for his personal benefits. As the news flashed to the headlines, the debate about the ethics of the business (and particularly) that of the wealth managers (WMs) is being discussed about. I am referring to an article published in national English daily, the Times of India (ToI). The article entitled “How Relationship Managers Cheat You” goes on discussing about the un-ethical or unfair practices adopted by WMs/RMs for generating more business from high net-worthy clients. The unfair practices adopted by WMs is of course a very serious issue, but their counterparts on the other side of the table i.e. their clients are equally responsible for many of such mishappenings, if not all! Though this does not mean that what Shivraj Puri and group did was justified/correct at all. That was entirely illegal and fraudulent. With this post, I am just trying to put my opinion about the role of the RMs/WMs in general.

Recent research has showed that markets move on fear and greed of investors. Investors in general and individual investors in particular are also influenced by greed and fear. Even high networth individual investors (HNIs) are not exceptions! They are gripped with several psychological biases as proved by research across the world. All these factors make them equally accountable for the loss attributed to wrong investment decisions.

I am listing some of the observations that lead the individual investors behave in a self-harming way, and also how RMs/WMs help them take such decisions:

(1)   Individual investors refrain visiting fee-based professional financial advisors who are said to be able to chalk out sound financial plans for their clients; but since such advisors charge hefty fees for their suggestions, people avoid consulting them often. Rather they approach RMs/WMs who do not charge at all, or at least the burden is not on the investors directly.

(2)   Most of individuals are eager to kickstart speedy wealth creation, so they want short cuts to mint money from the stock markets. It has been seen that many of them have their own list of preferred investments, even if they know little about the basics of those investments. RMs/WMs have to cater their needs, so they have to heed what investors/their clients want.

(3)   Very few investors invest according to their risk appetite and time horizon; they believe stock market investments as money minting machine and this belief is exploited by RMs/WMs to generate business for their employers. After all they are taking salary for this only!

(4)   Yeah, it’s also true that WMs/RMs don’t take time to understand clients or alter their approach, because they (the investors/clients), too, don’t have time to spend with their WMs/RMs in order to plan for their investment decisions. They need readymade financial plans that fit into their budget and yield higher returns quickly.

(5)   WMs/RMs is marketers, not sales people. They just project (attempt to position) the products from their own kitty as the best of the market. Some responsibility also lies on the investors to investigate properly before taking final call.

(6)   Finally, WMs/RMs act as Case Managers who need to consider the clients’ requirements, perceptions and ability to invest. At the same time, they have to generate business for their employer organizations.

It’s not the ‘always’ case that relationship managers or wealth managers cheat investors/potential clients. The behavior of potential investors is also responsible for any untoward actions taken by themselves, which may later prove financially harmful. So, it is the high and right time to think about the role of our own (individual investors, in general), along with that of intermediaries who are there to help us take profitable investment decisions.

PS: This article is not an attempt to justify the role of RMs/WMs such as Shivraj Puri of Citibank Guragon branch, rather this is an attempt to take a look on how we, as potential investors, seek high profits in short term without looking at the whole picture and take wrong investment decision; and are also accountable for our own losses to some extent.

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